1. This Reference which arises out of some extremely unusual facts has brought to light the difficulty of finding within the framework of the Indian Income-tax Act machinery for determining the liability of an alleged partner in an unregistered firm.
2. The assessee in this case was an unregistered firm, and one Gokuldas made a Return for the assessment years 1945-46 and 1946-47. The Income-tax Officer completed the assessments on 24-7-1947. Gokuldas had produced before the 'X. T. O. what purported to be a Deed of Partnership and in this Deed one Kikabhai was shown to be one of the partners. The X. T. O. accepted the Deed and passed an assessment order, but before this order was made on 6-7-1947 Gokuldas had made an application to the I. T. O. in, the following terms :
'I went to the partners for obtaining their signatures on the application for registration. They say that the profit or loss is mine and that they have nothing to do with the business. I am willing to pay income-tax on this business. The return which I submitted may be allowed to be amended or I may be permitted to submit a revised return'.
This request of the assessee was not accepted by the I.T.O., and he made two assessment orders one in respect of each assessment year --against the unregistered firm.
3. Against these orders of the I.T.O. appeals were filed by Gokuldas before the Appellate Assistant Commissioner; and one of the grounds of appeal was as follows :
'Having regard to circumstances of the case status be taken as individual, and not U. R. F. (unregistered firm) and the concern may be taxed as proprietary concern.'
The A.A.C. dismissed the appeals on 9-12-1947. Thereaiter on 3-3-1948 Kikabhai's property was attached for the payment of the tax levied on the unregistered firm, and Kikabhai filed an appeal before the Appellate Tribunal against the order of the A.A.C. in the assessment for both the years. In this appeal he made only the I.T.O. as the respondent and Gokuldas was not a respondent in that appeal. The Tribunal raised a preliminary question as to whether Kikabhai was competent to file this appeal and held that he was. The Tribunal then on 19-8-1949 made a remand order directing a further enquiry to be made into the question whether or not Kikabhai was a partner. It must be mentioned that Kikabhai's appeals to the Tribunal did not concern themselves with the quantum of assessment of the firm in respect of either of these years, but were merely confined to the question as to whether Kikabhai was a partner of the unregistered firm. The prayer in his Memorandum of Appeal was that the Tribunal should hold that Kikabhai was not a partner. At the stage of remand, it appears that Gokuldas appeared before the I.T.O. There was a protracted hearing, and when the matter came back to the Tribunal Counsel for Gokuldas appeared before the Tribunal, although Gokuldas was not a party to the appeal. The Tribunal describes the hearing as having been very hotly contested before them and after considering all the evidence before them, the Tribunal came to the decision that Kikabhai was not a partner. Gokuldas filed a Reference Application and made the Commissioner of Income-tax as the Respondent. On this application the Tribunal has referred to us two questions, but before doing so the Tribunal asked for the directions of this Court as to who should be the respondents to this Reference and in pursuance of the directions given the Tribunal has made in addition to the Commissioner of Income-tax, Kikabhai as well as the unregistered firm Gokuldas Dayalji and Co., as party respondents to this Reference. The questions referred to us are:
1. Whether Kikabhai was competent to appeal to the Tribunal against the orders of the Appellate Asst. Commissioner dismissing the appeals filed by Gokuldas? And
2. Whether the Tribunal was competent to examine and decide the question whether Kikabhai Abdulali was a partner in the firm of Gokuldas Dayalji and Co?
4. Now, the contention of Mr. J. P. Pandit who appears for Gokuldas before us, is that in assessing an unregistered firm the Income-tax Officer is merely determining the quantum of assessment and he is not concerned with and he has no jurisdiction to determine who the partners of that firm are. Therefore, an appeal against the order of the I.T.O. can only be an appeal in respect of the quantum of assessment which alone could have been the subject matter of the order of the I.T.O. Mr. Pandit does not deny that any partner of the unregistered firm has a right of appeal against the assessment order, but what he denies is that on such appeal he can raise any question as to his not being a partner, because he says that the question as to whether he is or he is not a partner can only be determined at the stage of recovery proceedings. Under the provisions of the Indian In-comc-tax Act, recovery of tax can ultimately be made through the Collector as if it was recovery of land revenue, and says Mr. Pandit, the Collector has all the powers under the Civil Procedure Code, 1908 for the purpose of recovering the amount, which powers would include the power to determine whether Kikabhai was or was not a partner if recovery was sought to be made from him. Against this contention Mr. Palkhiwalla for Kikabhai urges that there is jurisdiction in the I.T.O. to determine in the course of assessment of an unregistered firm the question as to who are the partners of such a firm. He further says that in fact the I.T.O. who passed the order in this case implicitly, if not explicitly, determined that Kikabhai was a partner. This order affected the liability of Kikabhai and since he denied his liability to be assessed, he was entitled to appeal to the Appellate Assistant Commissioner under Section 30. But as the appeal filed by Gokuldas before the A. A. C. had already been disposed of before Kikabhai became aware of the fact that he had been held to be a partner of the unregistered firm, and because in that appeal, notwithstanding the request of Gokuldas that he should be treated as an individual, the A. A. C. had completed the assessment on the unregistered firm and impliedly also confirmed the finding of the I.T.O. that Kikabhai was a partner of that unregistered firm, his remedy only lay by way of an appeal to the Tribunal.
5. Now, in the first instance, it is to be noticed that under Section 23 (5) when the total income of a firm has been assessed, in the case of a registered firm, tax is not levied on the firm in respect of such income, but the share of each partner in such income is taxed in his own assessment. No question can arise in the case of a registered firm as to who the partners are and what their shares are in the partnership because once the partnership is registered the partners and their shares are known and the Income-lax Officer is bound to accept them. Under Sub-clause (b), however, in the case of an unregistered firm, the assessment is on the unregistered firm itself and the tax is levied on the unregistered firm. The I.T.O. has the option if the exchequer is likely to benefit thereby to tax the income in the hands of the partners as if it was a registered firm; but that, option was not exercised in the present case; and, therefore does not concern us. Thus it would appear that where the tax is levied on an unregistered firm there may not be an occasion for the Income-tax Officer to determine who the partners of such unregistered firm are; but if this were the true position emerging from the provisions of the Income-tax Act, then the other provisions to which we will presently draw attention will work a serious hardship on an alleged partner against whom the liability for tax is sought to be enforced. Section 14, Sub-section (2) (a) provides that if the tax is paid by an unregistered firm it shall not be payable by a partner; but if it is not paid by or recovered from the unregistered firm, it follows that it can be recovered from the partners. Before any amount can be recovered from any assessee, there has to be a notice of demand under Section 29 which is in these terms :
''When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable.'
Now, in the case of an unregistered firm, the firm itself is assessed and its partners would fall, in our opinion, within the expression 'other persons liable to pay such tax' in Section 29 and if it is sought to enforce the liability against any such person, in our opinion, it is essential that a notice of demand should be served on such person under Section 29. Incidentally, no such notice was served on Kikabhai in this case, but the question is when and in what proceedings does the I.T.O. determine whether an alleged partner was in fact a partner of the unregistered firm and, therefore, a person liable to pay the tax imposed on the unregistered firm. It might have been arguable that the power to determine whether he was so liable was implicit in Section 29 and should be exercised after the assessment on the unregistered firm had been completed; but that leads to the result that the persons so held liable is without any remedy by way of appeal, because, a notice of demand under Section 29 is not a notice against which an appeal lies under Section 30 of the Act. We would therefore be reluctant to read a power in Section 29, after the assessment proceedings are completed to determine whether an alleged partner is a partner in order to saddle him with liability. Then, when we come to the recovery proceedings, Section 45 provides that if a person on whom a notice of demand has been served does not pay the amount within the time prescribed, he would be deemed to be in default and when an assessee is in default. Section 46 (1) empowers the I.T.O. to impose a penalty on him. Then Section 46, Sub-section (2) empowers the I.T.O. to forward to the Collector a Certificate under his signature specifying the amount of arrears due from the assessee and the Collector on receipt of such certificate shall proceed to recover from such assessee the amount specified therein as if it were arrears of land re-venue; and if the recovery was made on the oasis of arrears of land revenue under the Land Revenue Code, there is no provision under the Land Revenue Code for disputing the amount thus specified at the stage of recovering the amount that is certified to be due. Then the proviso to Sub-section (2) provides that without prejudice to any other powers of the Collector in this behalf he shall for the purpose of recovering the said amount have the powers which under the Code of Civil Procedure, 1908, a Civil Court has for the purpose of the recovery of an amount due under a decree. The effect of the proviso is that if the Collector does not choose to exercise his power to recover the tax due as arrears of land revenue and proceeds to recover it under the Code of Civil Procedure, then he has all the powers under that Code 'for the purpose of recovering the said amount.' This is the proviso on which Mr. Pandit relies for the purpose of his argument that the proper place to dispute the liability as a partner of an unregistered firm is before the Collector in recovery proceedings. But Mr. Pandit forgets that the Collector is not bound to recover the amount under this proviso and he may choose to recover it under the Land Revenue Code in which case the alleged partner from whom the recovery is sought to be made appears to be at the stage of recovery entirely without any remedy. In addition to this, there are further Sub-clauses of Section 46 which confer powers on the I.T.O. in respect of recovery of tax. Sub-section (3) empowers the Income-tax Commissioner to direct that arrears of tax may be recovered by any process enforceable for the recovery of arrears of Municipal tax or a local' rate and the I.T.O. may proceed to recover it accordingly. Sub-section (5) provides that the Income-tax Officer may direct any person from whom salary is due to the assessee to deduct from the salary any arrears due in respect of income-tax and such person shall be bound to comply with the requisition. Section 5 (a) empowers the Income-tax Officer to issue a prohibitory order requiring any person from whom money is due to the assessee to pay to the I.T.O. so much of the moneys as is sufficient to pay the tax. Here again, if these powers are resorted to, the alleged partner is absolutely without a remedy if during the assessment proceedings there was no adjudication that he was a partner and if there was no power in the I.T.O. so to adjudicate. Therefore, although it is not strictly relevant for the purpose of determining whether there is such a power in the I.T.O. to consider what the consequence of an absence of power would he, ret if the consequence of the absence of such a power would be to deny to a person saddled with liability to pay tax which is imposed on an unregistered firm, an opportunity of having it determined in some proceedings whether he is or he is not liable, the Court in our opinion would be inclined to put upon the provisions of the Act a construction that would avoid such a consequence and that would be in consequence with what is just and right in this context, provided the language of the Act is capable of bearing such a construction. It 13 from this point of view that we will now consider the relevant sections to discover whether there is an express or implied power in the I. T. O., in the course of assessment under Section 23 to determine who the partners of an unregistered firm are.
6. Now, to begin with, Section 22(5) provides that the prescribed form of return shall in the case of a firm require the assessee to furnish particulars of the names and addresses of the partners and their shares; and Rule 19 of the Rules -carries out this statutory requirement by prescribing a form which has a tabular statement to be completed in the case of firms giving the name of each partner in one column, his address in the next column and the extent of his share including interest on capital, salary, commission or other remuneration in the third column. Therefore, it is obligatory in the return of every firm to give particulars about who the partners are and what their shares in the partnership are. Then when one comes to Section 23, Sub-section (1) provides that if the I. T. O. is satisfied that the Return is 'correct and complete' he shall assess on the basis of the Return. Now, one of the essential items in the return of a firm being who the partners are, the I. T. O., would have to be satisfied as to whether that part of the return is correct and complete. Section 23(2) provides for cases where the I. T. O. is not so satisfied, and in that event the Sub-section provides that he may call upon the person who made the return to attend at the office of the I. T. O. or to produce evidence on which such person may rely in support of the return; and Sub-section (3) provides for a hearing on the appointed ' day and a determination by the I. T. O. by an order in writing. Therefore, if the I. T. O. is not satisfied that the partners of any unregistered firm are as stated in the Return, he has the power or authority implicit in this section to make an investigation and to determine whether any one or more of the persons mentioned in the Return are or are not partners. This determination is also necessary for other essential purposes of assessment. One of such purposes is the computation of the income of a business under Section 10. When one turns to Section 10(4) (b), it in effect provides that any interest, salary or remuneration paid to a partner shall not be allowed as an exception under Section 10, Sub-clause (2) (xv) of the Act. Obviously for the purpose of giving effect to this proviso, the I- T. O., must know who the partners are. Similarly, under Section 26 Sub-section (1) if there is a change in the constitution of a firm, the assessment is required to be made on the firm as constituted at the time of making the assessment. This is a mandatory provision and in order to give effect to it, the I. T. O. must of necessity determine who were the partners in the accounting year and who are the partners at the time of making the assessment. It is important also to note that the Section requires in terms that the assessment shall be made on the firm as constituted at the time of making the assessment. Therefore, the assessment order must state how the firm was constituted at the time of the assessment and make an assessment on such firm only. Therefore, we are inclined to read in the provisions of Section 23 of the Income-tax Act an implied power in the I. T. O. to determine who the partners of an unregistered firm are; and indeed it would be his duty so to determine for the purposes we have already indicated above. In making such a determination, if the I. T. O. accepts the Return which may have the effect of saddling with liability the persons mentioned in the Return as partners, if they are not in fact partners, such course would be contrary to the principles of natural justice. In the case of a registered him, as we have pointed out earlier, no difficulty would arise, because the registration is conclusive as to who the partners are and what their shares are, but in the case of an unregistered firm before the I. T. O. is satisfied that a Return is correct and complete in so far as it concerns the names of partners and their shares, it seems to us that there is an implied obligation on the part of the Income-tax Officer to give notice to the alleged paitners that a return has been filed showing that they are partners and what their shares are and that he proposes to accept the Return unless they appear and show cause. Similarly where he does not accept the Return and calls upon the person who made the return to appear before him, if he determines who the partners are and what their shares are, behind the back of the alleged partners that would again be acting contrary to the principles of natural justice; and therefore we consider that there is an implied obligation under Sub-section (2) of Section 23, when the I. T. O. does not accept the Return with regard to the question as to who the partners are and what their shares are, to give notice not only to the person who made the return on behalf of the unregistered firm but also to every alleged partner; and where after notice to all the alleged partners the I. T. O. proceeds to determine who the partners are and what their shares, obviously an appeal against this part of his order shall lie under Section 30 at the instance of any one who denies his liability to be a partner and from the decision of such appeal a further appeal shall in an appropriate case lie to the Tribunal. If the I. T. O. determines the question without notice to the parties concerned, then his determination will be liable to be set aside in appeal at the instance of an aggrieved party because the determination in the absence of the party concerned cannot bind him; and if the I. T. O., does not exercise his power and perform his duty to determine who the partners of an unregistered firm are, the I. T. O.. would have no right or authority to seek to enforce the payment of the tax against an alleged partner, whose liability has not been adjudicated upon by him in the assessment proceedings. Such, we conceive, is the true position on the construction of the relevant sections to which we have already drawn attention.
7. Turning next to the facts of the matter before us, a great many things appear to have been done quite irregularly. In the first instance there is the I. T. O's order and in that order the I. T. O. states that a Deed of Partnership had been produced and since no application for registration of the partnership had been made, the concern would be treated as an unregistered firm and subjected to tax as such We agree with Mr. Palkhiwalla that implicit in this order is a finding that the partnership consisted of the persons mentioned in that Deed and their shares were as shown in that Deed. But this order was passed without any notice to the alleged paitners & behind their back and Kikabhai was not before the I. T. O. and had no opportunity of appearing before him. Therefore, this order was liable to be set aside at the instance of Mr. Kikabhai on appeal to the extent to which it held that Kikabhai was a partner of the unregistered firm. But in this case Kikabhai was not aware of this order until the date on which his property was attached and in the mean-time Gokuldas had already filed an appeal against the assessment order in which also a question arose for determination by the A. A. C. as to whether Gokuldas was the sole owner of this business, and the appeal had been disposed of, the A. A. C. confirming the decision which was implicit in the order of the I. T. O. that the assessee was an unregistered firm of which the partners were as shown in the partnership deed. In the circumstances, it appears to us that an appeal lay at the instance of Kikabhai to the Tribunal on this question as to whether he was or was not a partner. But obviously to this appeal the other partners were necessary parties because they were interested in the decision of the question as to whether or not Kikabhai was a partner. They were not so made parties to this appeal before the Tribunal; but on the facts of this case no injustice appears to have resulted from that fact, because although it is true that upto the date of the remand order Gokuldas did not appear and probably had no knowledge of the appeal by Kikabhai to the Tribunal, obviously he appeared at all relevant times. He appeared before the I. T. O. in the proceedings upon remand, and he also appeared finally before the Tribunal when the matter was disposed of, although he was not made a party respondent as he should have been. Therefore, we are satisfied that although the proceedings were in some respects irregular, no injustice has thereby resulted to Gokuldas.
8. Our answers to the two questions referred to us are (1) in the affirmative and (2) in the affirmative.
9. Mr. Amin for the Income-tax Commissioner does not ask for any order for costs.
The applicant before us, Gokuldas shall pay the costs of Kikatahai of this reference.
10. Answers in the affirmative.